The hunt for yield is nothing new but each time central bank policy has loosened over this long economic cycle, it has placed further constraints on those needing an income from their investments. 
As looser policy drove prices up and yields down across fixed income markets, investors inevitably looked for income from other assets, including dividends from stocks.
But, where fixed income saw price increases more uniformly across the bond and credit market, the fortunes of the higher-yielding equity markets – UK, Switzerland, eurozone and Australia – were more varied.
Performance patterns in higher-yielding stock markets
From 2015 to the present – a period with phases of both policy easing and policy tightening – the GDP weighted average 10-year yield across the high dividend equity regions was just 75 basis points.
Little wonder, then, that the average dividend yield of around 4 per cent across UK, eurozone, Swiss and Australian equity indices appeared attractive.
For the first 18 months, the indices moved largely in lock-step, buffeted by wider economic concerns emanating from the US, following the 2014 slump in oil prices.
However, midway through 2016 the fortunes of our ‘high yielders’ began to diverge, reflecting a range of idiosyncratic issues: starting with Brexit, followed by periodic policy and political developments in Europe, and latterly some fragility in Australia’s famously resilient economy.
Over the last five years, the four regions yielded an average dividend of 3.3 per cent to 4.5 per cent, compounding to between 17.5 per cent and 24.5 per cent in dividend income. But price returns – particularly once currency is taken into account – vary considerably.
In USD total return terms, Swiss stocks almost kept pace with the developed market aggregate (which includes a very high US weighting); Australia and the eurozone are in the middle of the pack, while UK stocks are the clear laggard. Indeed, excluding the dividend yield, UK equities have lost around a percent a year in USD terms since 2015.
Today, the dividend yields on these four equity indices are 3 per cent to 4 per cent above their respective domestic 10-year sovereign bond yields, making them an attractive proposition for investors seeking income. But is this sufficient to compensate for the risk to capital inherent in equity markets?
While stability and predictability of yield might be the primary consideration of income-seeking investors, erosion of capital is still unwelcome, just as the potential for some price return would be a welcome boon.
Looking beneath the surface
If we look beneath the surface at the individual indices, Swiss stocks have become expensive on both price-to-earnings and price-to-book metrics and the dividend yield is now well below its 10-year average.
While it remains a high quality market with scope for modest earnings growth, Switzerland, when compared with aggregate world equity, effectively has an overweight to healthcare and consumer staples, and an underweight to tech.
Given that the healthcare sector could become politicised in this year’s US presidential election, a high exposure to healthcare could be a source of uncertainty.
Australia, eurozone and the UK are similarly underweight the tech sector, relative to aggregate developed market equities. This may present a headwind if tech sector earnings and margins continue to outpace the wider market.
For Australian equities, the dividend yield is still north of 4 per cent, but the Australian index is almost two standard deviations expensive in P/E terms compared with its 10-year average. This makes it even more expensive, relative to its recent history, than the S&P 500. Yet despite high valuations, the Australian market is insulated by the Superannuation system and the high domestic bias of investors in Australia.
The UK market now offers the highest dividend yield of major equity markets; it is also one of the most unloved equity regions.
Political uncertainties persist and the shape of the UK’s future trade deal with the European Union remains a major unknown. The currency has suffered as a result. Yet even the weak pound has done little to boost the fortunes of the UK index which, given its heavy concentration of non-UK revenues, usually revels in a weaker pound.
In the near term, meaningful earnings upside for the UK market is probably going to be constrained by domestic uncertainties and low corporate confidence.
But, for investors seeking income, it is worth keeping in mind that the UK market has already weathered a significant storm in the last few years. Valuations are undemanding at both the index and sector level, and the dividend yield is more than 4 per cent higher than that of 10-year gilts.
For a traditional equity investor seeking strong capital growth and some dividend return, the UK may not yet be an especially attractive market.
But for an investor focused on income, and for whom dividend yield is paramount, the UK market is beginning to look appealing – with both valuations and the currency providing a cushion for the capital committed to capturing that income stream.
John Bilton is head of global multi-asset strategy at JP Morgan Asset Management. The views expressed above are his own and should not be taken as investment advice.